Weekly ETF Report

The Golden Boy Squashes the Spider

August 24, 2011

The price of gold is up about 30% since the beginning of the year, and the shine in the value of the yellow metal now has made the SPDR Gold (GLD) the largest exchange-traded fund (ETF) on the block. This Golden Boy officially squashed the SPDR S&P 500 (SPY) ETF, commonly known as the Spiders, which formerly laid claim to the biggest bug on the block.

At last count, GLD had approximately $77.9 billion in assets, which edged out the approximate $74.4 billion in assets held by SPY. The rise of gold in terms of assets tells us a couple of important things. First, it shows you how the public has turned away from stocks and moved into hard assets such as precious metals. Second, it tells us that the price of gold could be approaching a serious bubble.

I’ve always held the opinion that when nearly everybody out there pours into one assets class, then it’s time to pause, to reflect and, quite possibly, to swim against the stream.

Remember that, all too often, running with the herd can get you trampled. This sentiment served me well between 2004 and 2006, when all of the rage was buying and selling homes and “flipping” them for a profit. Recall that cheap money, easy-lending standards and rising home prices created a bubble in the housing market, a bubble that ultimately led to the Great Recession that we’re still fighting our way through.

During that time, I had callers to my radio show ask me if they should be buying real estate. I warned back then that real estate prices were destined for a collapse, not only because the cheap money and easy lending standards were bound to end soon, but also because everyone and his brother was asking me about real estate and whether they should buy. The mere fact that so many investors were so interested in real estate raised a major red flag for me.

I think the same thing could be happening here with gold, although there are plenty of sound structural reasons why gold prices should continue rising. The foremost reason is the debasing of currencies worldwide by central bankers. Yet the mere fact that everyone now is interested in owning gold has me a bit concerned that a potential golden bubble is taking shape.

As with most bubbles, they tend to burst very quickly, and very painfully. They also leave a lot of scattered debris along the way, and that scattered debris is in the form of some very disappointed investors.

Interestingly, during the past couple of days, we’ve seen a big drop in gold prices. Could this be the start of a big pullback in gold? Perhaps, but we’ll have to wait and see how the situation shakes out. In my ETF Trader advisory service, we recently bought a fund designed to take advantage of the current decline in gold prices. If the golden bubble does burst, this fund will shine. To find out more about our latest golden play, check out the service today.